Costs from Trump's tariffs paid almost entirely by US consumers, NY Fed says

New York Fed research shows the average tariff on imported goods rose to 13% in 2025 from 2.6% at the start of the year, and that roughly 90% of the cost of increased tariffs on goods from Mexico, China, Canada and the EU was borne by U.S. firms and passed on to consumers. Independent studies (Kiel Institute, NBER, Tax Foundation) report near-complete pass-through, collapsing trade volumes rather than price cuts by exporters, and household cost increases of about $1,000 in 2025 and $1,300 in 2026; the effective tariff rate is estimated at 9.9%, the highest since 1946. The findings imply direct upward pressure on consumer prices and weaker import volumes, likely weighing on consumer demand and offsetting any projected gains from domestic tax cuts.

Analysis

Market structure: Broad 2025 tariff rise (2.6%→13%) with ~90–100% pass-through shifts pricing power toward import-competing domestic suppliers (materials, some industrials) while compressing margins and volumes for import-heavy retailers and consumer discretionary names. Expect near-term retail price-led demand destruction (private estimates: -3–7% volume hit in affected categories within 6–12 months) and elevated core goods CPI by +0.5–1.0 percentage point vs. baseline through 2026.

Competitive dynamics: Firms able to source domestically or fully pass costs gain share; those with tight low-margin, high-import models (e.g., discount apparel, electronics assemblers) lose share or face SKU rationalization. Over 12–36 months, winners will be domestic steel (NUE, X) and reshoring beneficiaries (automation, industrial capex), while losers include import-reliant retailers (TGT, NKE, AAPL’s hardware suppliers) until supply chains realign.

Cross-asset & macro: Tariff-driven CPI upside increases breakeven inflation and pushes Treasury yields higher (10y +20–50bp risk), favors TIPS (TIP) and USD strength; commodities mixed — industrial metals supported, oil pressured by demand loss. Equity vol and sector dispersion will rise; use options to hedge concentrated retail exposure.

Risks & catalysts: Tail risks include retaliatory tariffs, currency moves, or rapid exporter price cuts (low probability but market-moving). Key catalysts: monthly CPI prints, Q2–Q4 2025 retailer earnings, announced reshoring capex (>+$500m deals), and any legislative/administrative tariff rollbacks within 30–90 days.

Key Decisions for Investors

• Establish a 2–3% portfolio long in domestic steel: buy NUE and X equally (1–1.5% each) with a 6–12 month horizon to capture pricing tailwind from import protection; trim if steel spreads narrow or new import quotas roll out.
• Reduce exposure to import-heavy retail/consumer discretionary by 3–5%: initiate 1–2% short positions in TGT and a 1% short in NKE (or buy 3–6 month 10–15% OTM put spreads) to protect against expected 3–7% volume declines over next 2 quarters.
• Increase real-inflation protection: add 2–3% allocation to TIPS (TIP ETF) and consider a 3–6 month long breakeven trade (buy 5y breakeven via TIPS/UST relative value) if CPI monthly prints beat consensus by >0.2ppt.
• Pair trade (relative value): long NUE (1%) vs short WMT (1%) — rationale: domestic materials capture passthrough while big-box retailers suffer margin mix; monitor retail same-store sales and vendor margin trends over next 60 days for exits.